A comparative analysis of the effect of board characteristics and governance indices on companies' costs of financing: The Canadian evidence

Abstract

The objective of this study is to examine the effect of board of directors' characteristics compared to that of governance indices that measure board quality, on the costs of financing Canadian firms. We find that the majority of board characteristics have an important and significant effect on the cost of equity capital, the cost of debt and the average cost of capital. On the other hand, in the case of the financing costs studied, we find that the effect of governance indices that assess the quality of boards of directors is not clearly established. Particularly, our results reveal that individual measures of the characteristics of boards of directors allow for a better explanation of companies' costs of financing than do multi-factor commercial and academic governance indices.